Daniel Fetner’s Post

M&A deal activity rose five to 10% year-over-year in Q1, despite falling short of Q4 2023 totals, according to new data released by PitchBook. Deal multiples have remained stable, meanwhile – “a sign that the valuation reset may be complete, and have room to move higher to catch up with elevated prices of public companies,” said the market research firm. Global M&A had declined for two years straight heading into 2024. According to PitchBook, M&A has almost always bounced back from consecutive annual declines, and researchers at the company do not think this year will be any exception. Cody Crook, managing director of Hunt Scanlon Ventures, unpacks what it all means for human capital M&A activity. Read more >> https://lnkd.in/eHa6wqMw

Finding PE-backed companies in specific niches was one of our most-read articles last month, and it's no surprise. For investment bankers and M&A professionals, uncovering PE-backed companies or private equities active in your area of interest can be a strategic ace up your sleeve. 👉 Find strategic acquisitions: Target PE owned companies nearing the crucial 5-7 year investment mark in your niche. 👉 Source new deals: Discover companies ready for sale and position yourself as the go-to advisor. 👉 Identify potential buyers: Pinpoint private equities for whom your client would be the ideal addition. And, while it might go without saying, leveraging Inven makes this easier than ever before. Discover both traditional and AI-driven strategies to uncover these gems: https://lnkd.in/dKWPWuG8

If you have ever looked into selling a business, you may have learned that there are many types of buyers and deal structures, from employee buyouts, strategic acquisitions, to private equity firms. To make the right decision for you and your business, it is essential to have relevant and accurate information about your own business and the types of buyers available. We have noticed many misconceptions about a particular kind of buyer: the private equity firm. Of course, a private equity buyer may or may not be the right fit for you, but these common misconceptions can deter an owner from considering what may otherwise be a viable option. This article hopes to dispel some of the most common myths about private equity buyers and what private equity firms do. To read more click here https://buff.ly/3STCfvj.

𝗪𝗵𝘆 𝘄𝗲 𝗰𝗵𝗼𝘀𝗲 𝗮 𝗵𝗼𝗹𝗱𝗶𝗻𝗴 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 It is worth reflecting on why we are doing things differently compared to our peers. Nearly everyone in the business of “buying companies” raises a fund (structured as a General Partner/Limited Partner partnership) modelled after private equity. They are typically compensated based on the Internal Rate of Return calculated as the growth in investor capital divided by the time period from time of acquisition to time of an exit. As Charlie Munger says, “show me the incentive and I will show you the outcome.” It is not surprising that private equity firms maximise leverage and aim to “flip” their acquisitions in the shortest possible time. They are playing with other people’s money and other people’s businesses. Your risk, as a limited partner or seller of business, is their reward. If private equity’s business model was completely aligned with its investors, then perhaps this is a fair trade. The reality, however, is that their business model has strayed further and further from this. Many large private equity firms make the majority of their revenue from management fees rather than performance-based fees. Heads they win, tails they win more. Their goal has become to raise as many large funds as possible, regardless of their ability to deploy this capital to achieve exceptional returns. There is another, less obvious, challenge of the private equity model. In private equity, the cash flows from a cash-generating business with low growth potential cannot be redeployed into a capital-hungry business with high growth potential. In essence, each “deal” needs to stand on its own until sold. It seems short-sighted, almost irrational, to invest so much time, energy and money into a great, profitable and cash flowing business, only to sell or abandon it just years later because it hasn’t met an artificial growth rate, dictated by a spreadsheet. 𝗔𝗿𝗯𝗼𝗿 𝗣𝗲𝗿𝗺𝗮𝗻𝗲𝗻𝘁 𝗢𝘄𝗻𝗲𝗿𝘀: 𝗛𝘂𝗺𝗮𝗻 𝗫 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗹𝗲𝘃𝗲𝗿𝗮𝗴𝗲 The advantage of a holding company model is that it creates an internal capital market. In the hands of a skilled team, this allows a kind of discretion and long-term thinking that is impossible to achieve on a “deal by deal” basis. We think of our internal capital market as not only financial capital, but also human capital. Our aim is to share best practices frequently between companies and help place our Operating Partners into whichever roles have the highest possible leverage. We believe that our edge lies in acquisitions that are too sub-scale, too operationally unsophisticated, or too long-term minded to be good bets for private equity.

Life in Private Equity When Deals Are Slow In the relentless tempo of private equity, where 100-hour weeks are often the norm, there comes a time when the frenetic pace of deal-making slows. This slowdown poses a unique set of challenges—and opportunities—for professionals in the field. With deal volumes declining from their zenith in 2021, amid rising interest rates and economic uncertainties, the question arises: How does one stay productive in quieter times? The answer lies not in idleness but in proactive engagement. The search for new targets shouldn't pause; it's an opportune moment to build and nurture relationships with potential acquisitions. Downtime is a luxury, allowing investors to scout the horizon for opportunities that may not be immediately apparent but could bear fruit in the future. Maintaining dialogue with priority acquisitions is crucial, regardless of the immediate feasibility of a deal. The aim is to be top of mind when these companies decide to explore selling options. This period also offers a chance to delve deeper into the needs of existing portfolio companies. In times of economic contraction, these businesses often face significant challenges, requiring an investor’s undivided attention. Moreover, a lull in primary acquisitions doesn't necessarily signal a slowdown in smaller, strategic add-on deals for existing portfolio companies. On the contrary, such periods can be ripe for these transactions. The essence of private equity work is its adaptability and the diverse skill set it demands. Slow periods offer a chance to explore new areas, build relationships, and support portfolio companies through challenges. It's an invaluable time for personal and professional growth, allowing investors to develop the broad perspective and deep expertise that define successful careers in private equity. In essence, the quiet moments are not just pauses but pivotal opportunities for strategic advancement and learning.

When starting our microcap opportunities strategy, my partner and I came up with some foundational principles that we could stand by regardless of how many deals we did or how much money we were managing. For lack of a better number, I came up with 10 (see below). Anything you like? Don't like? Or that we missed? 1.      We don't win unless our clients win—and we never forget that. 2.      Every action we take starts with a win-win, partnership-first orientation. There are a lot of players in microcap land who exist to take advantage of small companies. We will be the antithesis of that. 3.      We are doing this not simply for the financial reward but also for the joy of learning about new businesses. We will stop if the process ever ceases to be fun. 4.      The capital in a transaction is a commodity. Relationships are not. We will win and lose based on our relationships and our ability to serve as a bridge between different players in the ecosystem. 5.      While not guaranteed, success can come from doing things other people deem too hard or not worth their time. With that as a backdrop, we will make mistakes along the way, but they will never come from lack of effort or focus. 6.      We will not hesitate to refuse to work with companies or other partners who do not share our vision and principles. 7.      There is a wide open and evergreen opportunity to build a premium brand in the microcap space, one that starts with the premise that there exist real businesses that have been neglected by other market constituents. 8.      There is still room in this lawyer-dominated world for handshake deals between constituents and partners. But we reserve the right to act forcefully in order to protect our LPs and companies. 9.      Size is the enemy of success. We aim never to get too big to be unable to fund a company in our original investment universe. 10.   No matter what people say about the availability of capital, good deals get funded. We have that phrase tattooed on our foreheads. For anyone who is interested in learning more, these are included in the "white paper" I crafted for our strategy: https://lnkd.in/g7HwTM-c

Idiotopedia Lite: Exit Game Plan As my best friend's company prepares for an IPO, I'm helping him appraise his business to gain valuations and market confidence. I realized that even though the company is doing good business, giving 20% to the public is complicated and requires a sophisticated appraisal process to illustrate the business is solid. According to trends, market values are shifting, making it even more necessary to have a sound approach to capitalize on these changes. I've learned we're looking at several pricing approaches for a reasonable IPO price. Each illustrates the company's financial health differently. For example, I use: - Relative Valuation: to see how his company stacks up against others in the same industry. His competitors are trading at an average Price-to-Earnings (P/E) ratio of 15, and he had a net income of USD 20 million last fiscal year. This means that his possible market capitalization is USD 300 million. On the other hand, since only 20% of shares are being sold, his IPO shares are worth about USD 60 million. Another model: - Absolute Valuation: especially the Discounted Cash Flow (DCF) method. Assuming that the company will have $25 million in free cash flow (FCFF) next year, a modest growth rate of 5% per year, and a weighted average cost of capital (WACC) of 10%, the DCF formula finds the present value (PV) of future cash flows as: PV = \frac{FCFF}{(1 + WACC)^n} where n is the number of years to come; by adding these up over 5 years, I can simulate an intrinsic value that gives him another way to base his IPO pricing plan. Next model: - Economic Valuation: I look at more specific information like leftover income, which usually shows a promising future for a business like his business that makes money. When liabilities and assets are considered, the value can often be higher than what would be found on the market alone, especially if risk factors are handled well. Last model: - Price-to-Earning Multiple Valuation: it helps me get in line with standard practices in the business. If his expected earnings growth is higher than the average of his competitors, then changing the P/E ratio to show this optimism in his prospectus could be a good way to raise the price of his IPO. Anyway, I think an unstable market makes IPOs difficult. The following methods give investors a roadmap, but recent market shifts, especially in Indonesia, may deter them. This may require resetting company value assumptions and offering prices. The biggest question is how to conduct this IPO sensibly during market volatility. Can the company's solid fundamentals and strategic story turn investors into backers? The last test will determine IPO success. These models are easy sampling compared to the the problematic ways to "make-up" the storyline to increase IPO price. Perhaps someone can tell me more to become a good "underwriter" as I'm not one. Any other thoughts?

𝐔𝐧𝐥𝐨𝐜𝐤𝐢𝐧𝐠 𝐕𝐚𝐥𝐮𝐞 𝐓𝐡𝐫𝐨𝐮𝐠𝐡 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐜 𝐌&𝐀: 𝐊𝐞𝐲 𝐈𝐧𝐬𝐢𝐠𝐡𝐭𝐬 𝐟𝐫𝐨𝐦 𝐃𝐚𝐯𝐢𝐝 𝐖𝐞𝐬𝐬𝐞𝐥𝐬, 𝐀𝐝𝐣𝐮𝐧𝐜𝐭 𝐏𝐫𝐨𝐟𝐞𝐬𝐬𝐨𝐫 𝐨𝐟 𝐅𝐢𝐧𝐚𝐧𝐜𝐞 𝐚𝐭 𝐓𝐡𝐞 𝐖𝐡𝐚𝐫𝐭𝐨𝐧 𝐒𝐜𝐡𝐨𝐨𝐥 Having worked with private equity and venture capital firms on scaling investments, I’ve seen firsthand how critical strategic M&A is to drive long-term growth. Recently, I’ve been reflecting on some insights from David Wessels, a finance expert whose thinking aligns closely with the challenges and opportunities I’ve observed. Here are a few key takeaways that resonate with me when approaching M&A: 𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐢𝐬 𝐊𝐞𝐲 One of Wessels’ core points is understanding a business's intrinsic value, not just its price tag. In my experience, accurate valuation sets the foundation for better decision-making, especially when looking beyond the immediate financials to assess long-term potential. 𝐕𝐚𝐥𝐮𝐞 𝐁𝐞𝐲𝐨𝐧𝐝 𝐂𝐨𝐬𝐭 𝐒𝐚𝐯𝐢𝐧𝐠𝐬 While cost savings are always tempting in an M&A deal, I’ve found that the real value comes from unlocking operational synergies and creating sustainable competitive advantages. Wessels emphasises focusing on the strategic fit—how the combined entities can collaborate to innovate, expand customer reach, or enhance product offerings. In my work, that’s where I’ve seen deals truly transform businesses. 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐲 𝐌𝐞𝐞𝐭𝐬 𝐂𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐞 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐲 I couldn’t agree more with Wessels’ view that M&A is most effective when it aligns with long-term corporate goals. A deal shouldn’t just make financial sense on paper—it should fit seamlessly into the broader vision of the business's future. 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 𝐢𝐬 𝐄𝐯𝐞𝐫𝐲𝐭𝐡𝐢𝐧𝐠 From my work with private equity, I know that thorough due diligence can make or break an acquisition. It’s not just about what a company is worth today but what it can achieve tomorrow with the right strategic direction. Wessels’ focus on valuation discipline is crucial in accurately assessing growth potential. In today’s competitive landscape, the right M&A strategy is a game-changer. It’s about looking beyond the numbers, understanding the long-term fit, and focusing on synergies that create real value. What’s your approach to M&A in today’s fast-paced market? I’d love to hear your thoughts and discuss unlocking value beyond the balance sheet. #MergersAndAcquisitions #CorporateStrategy #Finance #Valuation #PrivateEquity #VentureCapital #GrowthStrategy #Wharton #MyPerspective

Exploring Your Exit Options: What Comes After Deciding to Move On? In my last post, we discussed how to assess whether exiting an underperforming project is the right decision. If you've concluded that it's time to move forward, the next step is choosing the right exit strategy. Here are some key options to consider: 1. Asset sale: Strip and sell assets — physical items, IP (which can hold up to 99% of the company’s value), licences, and customer contracts. 2. Acquihire: Essentially, selling the team on a “per head” basis. 3. Company sale: Sell the business as a going concern, though at a reduced valuation. Structuring the Deal: When there’s an acquihire or a company sale, chances are the deal will be structured as a combination of cash and shares in the acquiring company. The stakeholders of the company (founders, investors, team, investors’ investors) may all have different preferences for the structure depending on factors like their liquidity requirements and their vision regarding the acquiring company’s perspectives. Of course, myriad additional factors are involved, so some sort of compromise should be reached. Alternatively, a deal may be structured taking different parties’ interests into account and offering them separate terms according to their preferences (just like with any sale of any company). For example, investors may get cash while the founding team may get a combination of cash and shares or only shares. It’s likely that different stakeholders in the company may opt for divergent exit routes, each pulling in their own direction. For example, a company founder may prefer an acquihire even for a relatively small amount (or even zero — when a company has amassed some debt that can be repaid by the acquirer) — that way they get to keep at least some of the team that they are used to working with, have some sort of guarantees for their immediate future and that of their team, and have some perspective in the acquiring company. Investors, of course, would often prefer to get cash. This journey is never straightforward, but with careful planning, it can be managed effectively. 

Bain Capital has agreed to acquire Envestnet, Inc, a leading provider of wealth management software and technology solutions, for $4.5 billion or $63.15 per share. This move, announced on July 11, 2024, is set to close in Q4 2024, pending shareholder and regulatory approvals. Envestnet, managing over $6 trillion in assets and supporting nearly 20 million accounts, offers a platform used by more than 109,000 financial advisors. Jim Fox, Board Chair and Interim CEO of Envestnet, expressed pride in the company's achievements. Phil Loughlin and Marvin L., Partners at Bain Capital, emphasized Envestnet's innovative technology and data capabilities as key factors in their decision. Milton Berlinski, Co-Founder and Managing Partner at Reverence Capital Partners, highlighted Envestnet's strategic growth positioning. Upon completion, Envestnet will transition from a public to a private entity, with strategic partners like BlackRock, Fidelity Investments, Franklin Templeton, and State Street Global Advisors holding minority positions. Tom Sipp, EVP Business Lines at Envestnet, noted the deal’s potential to enhance the platform, making it more customized, connected, and intelligent. Co-founder Bill Crager sees this acquisition as a positive development for Envestnet’s clients and employees, preserving the company's entrepreneurial spirit. However, this deal is not without challenges. Envestnet has pursued an aggressive acquisition strategy, leading to strategic and tactical mistakes. Consultant Seth Adam Stuart pointed out issues such as overexpansion, ineffective integration of acquisitions, and taking on excessive debt for financial wellness expansions. The firing of long-term employees also resulted in a loss of intellectual capital. The financial community is watching how Bain Capital will address these issues. While new capital and flexibility are positives, there is an urgent need to pay down debt and realign for better outcomes for advisors, custodians, and clients. Bain is expected to cut resources and make new investments, pushing for more integration and efficiencies. Envestnet reported strong growth in Q1 2024, with a 9% revenue increase and significant improvements in earnings. Analysts highlighted Envestnet's solid market performance, with net flows marking the strongest since 2015. The partnership with FNZ Group, expected to scale in late 2024, aims to enhance offerings in RIA and Trust solutions, as well as broker-dealer solutions. As Envestnet transitions to a private company under Bain Capital’s wing, the collaboration with strategic partners signals strong support for its forward momentum. The firm's ability to execute its vision will be crucial in determining its success. #PrivateEquity #FinTech #Finance #MergersandAcquisitions #TechNews #FinancialTechnology #WealthManagement #Innovation #Technology #TechEcosystem